Q&A with Carmen: Should I Tap into my 401k and 403b to Payoff Debt?

Carmen Wong Ulrich

Wednesday, 20 Feb 2008 | 9:29 AM ETCNBC.com

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Carmen Wong Ulrich

By Carmen Wong Ulrich

Question:Can you tell me how do I get from under all my debt and build a retirement account so that I won't become a burden? I was divorced in 2000. I started to accumulate debt immediately trying to support myself and two children. Moved to Maryland in 2003, debt continued to increase to the sum of 28,000 in credit card and 25,000 in student loan. I have about 25,000 in a 401 and 4,000 in a 403. My retirement account has lost about $10,000 how do I stop the loss? How do I grow? I have two mortgages (6.7 & 7.7) should I combine them?

Jacqueline

Answer: Jacqueline, I don't know how much money you have coming in each month or how far you are from retirement but it sounds like no matter what, your debts have become a burden and your lack of retirement savings are a concern. A big mistake would be to touch your 401k and 403b to pay for your debts. The tax-friendly benefits of those accounts are too precious over time and to pull funds out would result in a substantial loss in instant fees and taxes—and continue to devote as much as you can to these accounts every month. Your mortgages are in good shape in terms of rates but with rates as low as they are these days (30-year fixed around 5.2%) you're smart to consider refinancing them into one lower-interest rate loan. My concern there is that with your debt load, your credit score may not be good enough to earn a better rate. Look into that (head to John's website: www.credit.com to find your credit grade and score) and in the meantime, maximize the money that you do have to pay off your debts. Track down every penny that leaves your bank account for a month—tally everything up and see where you're spending too much and where you can cut to devote more to your money payments. If your student loans are federal, don't worry too much about them—focus on the credit card debt. Pay off the card with the highest interest rate first and then hit the next and so on (of course, continue to pay the minimums on all the others). It's an efficient process and soon enough you'll get back on top of your game. Don't hesitate to get another job for a while to move things along. Good luck!